Understanding Charitable Remainder Trusts

undertanding charitable remainder trusts

This week, Devin and John are answering a question from the Facebook group regarding charitable remainder trusts. (If you’re not a member of the group, you should join!)

The member on the Facebook group got a letter from her college, inviting her to make a donation to the school, and she would get income from that donation. There are a lot of ways to do this kind of thing. First, we have the Charitable Remainder Trusts or CRT, which you can break down into CRUTS and CRATS, and beyond that NICRUT, NIMCRUT or FLIPCRUT. Fascinating so far, right?

Let’s say you have a retirement asset, but it has gained a lot of value over the years. Cashing it out would incur a large tax bill. How do you access this asset for retirement?

One way is to take the appreciated asset, and transfer ownership to a trust that pays you some amount over some period of time. When that period of time is over, whatever is left will go to the charity of your choosing. The remainder is going to the charity: hence the name Charitable Remainder Trust.

The cool thing is that this trust is considered a charitable entity, and charities don’t pay taxes. So you’ve put your appreciated assets into the trust, and the trust can turn around and sell the assets with no capital gains tax. You have 100% of the value, all tax free, inside this trust.

Now, in this trust, you’ll have some period of time that it will pay the beneficiary. It might be a specified period of years, or it might be your lifetime, or even two lifetimes.

If you do it as a fixed payment, like $1,000 per month, then that is a Charitable Remainder Annuity Trust (CRAT). The problem with an annuity is that you get that solid dollar figure, but if you anticipate the value of the asset inside the trust to increase,  you’re stuck with that same fixed payment.

This is when you might want a Charitable Remainder Unitrust (CRUT). This will pay you on a fixed percentage of the trust’s assets. Perhaps you might be 5% of the value of the trust annually, for your life. Now, if the value of the assets goes up, your payment goes up. If the value of the assets goes down, you’ll get less.

In order to qualify to be a CRT, you need to make sure that at least 10% of what you put into the trust will end up going to the charity in the end. This is an irrevocable trust, so once you’re in it, you’re in it. From a legal standpoint, the charity has a vested remainder. With a little math, we can calculate how much the remainder will be, and do a present value calculation to figure out what that is worth today. You get to take that amount as a charitable deduction right now.

In short, you’re taking this highly appreciated asset, sell it tax-free, enjoy income from the asset, and then get a tax benefit right now. Sounds great, right? So how do you get started?

These trusts are complicated. The IRS publishes forms for charitable remainder trusts, but Devin and John don’t recommend relying on these forms because they don’t cover a lot of situations. You want some very, very specific advice on this. You want to hire an attorney who is experienced in this stuff. Many of the very large charities have outside estate planning attorneys on contract to help donors set up these trusts for free.

Other types of trusts include the Net Income CRUT, which pays out the net income of the assets inside the trust, or pays the a certain amount or the net income. There’s a really complicated one, where you get to make up the years where you have lower payments in the years when you get larger payments, called the Net Income with Makeup CRUT (NIMCRUT). Complicated!

The point is that if you have charitable intentions, and you have highly appreciated assets, then you probably want to sit down with an attorney who understands these different options and investigate these tools a little more. Of course, there are other charitable options available, so you’re going to want an estate planning attorney that very thoroughly understands the complicated tax issues that come with these trusts.

Highlights:

  • Using a charitable remainder trust can lower your tax bill so that you can do a Roth conversion.
  • Why you need to start with charitable intent.
  • How to find an attorney that can help you set up these trusts. (You can contact John by going to BigPictureRetirement.net)

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